Several years ago, I worked with a boutique hotel group that had just completed a multimillion-dollar upgrade across its property. They’d enhanced everything, from plush new bedding to energy-efficient climate controls.
Their general manager was proud of the design, but what made the owners happiest was something far less visible: a cost segregation study that reclassified much of their investment into short-life assets eligible for bonus depreciation. That moved a large share of the deductions into the first year.
For property acquired and placed in service after January 19, 2025, permanent 100% bonus depreciation is back. That affects how hotels, resorts, and restaurants plan upgrades, expansions, and acquisitions.
If you’re in hospitality ownership or operations, pairing bonus depreciation with cost segregation can bring a large share of your deductions into the first year, if you can use the losses.
Understanding Bonus Depreciation for Hospitality Properties in 2025
Bonus depreciation allows you to deduct a large percentage (now, in many cases, 100%) of the cost of qualifying property in the year it’s placed in service, instead of spreading that deduction over its normal recovery period.
The One, Big, Beautiful Bill Act (OBBBA), signed into law on July 4, 2025, reinstated permanent 100% bonus depreciation for qualifying assets acquired and placed in service after January 19, 2025. This change eliminates the prior phase-down schedule and creates a stable, long-term environment for capital expenditure planning.
For hospitality operators, this means qualifying 5-, 7- and 15-year property and qualified improvement property can be fully deducted in the year it's placed in service.
Why Hospitality Properties Suit Bonus Depreciation
Hospitality properties often include a mix of assets that meet the under-20-year requirement, such as:
- Restaurant and bar equipment
- Guest room furniture and fixtures
- Decorative lighting
- Pool, spa, and fitness equipment
- Landscaping and exterior amenities
Many interior upgrades also qualify as Qualified Improvement Property (QIP), which carries a 15-year recovery period and is bonus-eligible. To qualify, improvements must be made after the building was first placed in service and must be strictly interior improvements. QIP does not include enlargements, elevators, escalators, or structural framework. Eligible examples often include interior redesigns, new flooring, wall finishes, and lighting systems.
Given the frequency of capital investments in hospitality, applying bonus depreciation for hospitality properties can bring deductions forward on each project.
Pairing Bonus Depreciation with Cost Segregation
A cost segregation study identifies which parts of a building or improvement project qualify for bonus depreciation. It reclassifies portions of the project into shorter recovery periods, often 5, 7, or 15 years.
Once reclassified, those components qualify for immediate 100% expensing under current bonus depreciation rules.
In one case, a hotel owner's cost segregation study reclassified enough assets to produce a large first-year deduction. Without that reclassification, the deductions would have been spread over decades.
With permanent bonus depreciation, that acceleration is now available without the time pressure of past phase-out rules.
Acquisition and Placed-in-Service Dates
Under the 2025 law, eligible assets must have been acquired and placed in service after January 19, 2025, to qualify for permanent 100% bonus depreciation.
Property acquired on or before January 19, 2025 stays on the prior phase-down: 40% if placed in service in 2025 and 20% in 2026. Careful planning of acquisition and renovation timelines helps you meet the more favorable threshold.
The permanence of the rule also allows for operationally driven timing. You can prioritize property readiness, market conditions, or cash-flow needs rather than rushing solely for tax deadlines.
State-Level Considerations for Bonus Depreciation
While federal rules are now permanent, many states do not conform to bonus depreciation and require add-backs on state returns. For multi-state hospitality operators, this can create mismatches between federal and state taxable income.
To avoid surprises, work with your tax team to model both federal and state impacts before finalizing large capital projects. In some cases, it may be worth structuring investments to plan for both.
Combining Bonus Depreciation with Other Tax Strategies
Bonus depreciation for hospitality properties interacts with other parts of a tax plan:
- Loss limits: A hotel with an average guest stay of seven days or less isn't a rental activity under the passive loss rules, so material participation decides whether losses offset other income. For properties that are rental activities, Real Estate Professional Status plus material participation is generally needed to use losses against nonpassive income. Either way, the excess business loss limit applies.
- 1031 Exchanges: The replacement property's carryover basis continues on the old depreciation schedule; only excess basis is treated as newly acquired and can be eligible for bonus depreciation. Exchanges now cover real property only, and Section 1245 recapture can still apply.
- Opportunity Zone Investment: See how cost segregation and Opportunity Zones interact, including the 10-year basis election.
Model these together with your CPA before relying on any one of them.
Step-by-Step Action Plan for Hospitality Owners
To plan for bonus depreciation:
- Identify projects: List all recent and upcoming property purchases, expansions, or equipment upgrades.
- Commission cost segregation studies: Reclassify eligible assets for immediate expensing.
- Track placement-in-service dates: Confirm both acquisition and placed-in-service dates fall after January 19, 2025.
- Model federal and state impact: Prevent unexpected state-level adjustments.
- Integrate with other strategies: Combine with REPS, 1031, or Opportunity Zone planning where relevant.
- Maintain strong documentation: Keep engineering reports, invoices, and workpapers so the study can be supported if the IRS examines it.
Next Steps
Permanent 100% bonus depreciation lets hospitality owners deduct qualifying capital investments in year one, and cost segregation identifies which parts of a project qualify. The benefit depends on acquisition dates, state conformity, and whether you can use the losses.
Request a free proposal from R.E. Cost Seg to see what a study would show on your property.
